Why heavier sanctions on Russia could backfire

WASHINGTON — Underlying talk about taking harsh punitive measures against Russia for its military incursion into Ukraine are economic complications and worries that sanctions levied against Moscow could backfire on the U.S. and Europe.

Heavier U.S. and European Union sanctions could sting Russia’s already slow-growing economy and hurt its financial sector. But Moscow could retaliate and seize American and other foreign assets or cut exports of natural gas to Europe, which is heavily dependent on Russia for energy.

Additional Photos

Demonstrators carry banners during a rally near the Russian embassy in Kiev, Ukraine, on Friday. As a result of its move into Ukraine, Russia already has lost billions from a stock market drop and the devaluation of the ruble. The Associated Press

Declaring his determination not to let the Kremlin carve up Ukraine, President Barack Obama on Thursday slapped new visa restrictions on Russian and other opponents of Ukraine’s government in Kiev and authorized wider financial penalties against those involved in the military intervention or in stealing state assets. Obama emphasized his resolve in an hourlong telephone call with Russian President Vladimir Putin, affirming his contention that Russia’s actions violate Ukraine’s sovereignty.

On Capitol Hill, both chambers of Congress looked to advance legislation imposing hard-hitting sanctions on Russia.

Obama hailed U.S. cooperation with the European Union, which on Thursday suspended talks with Putin’s government on a wide-ranging economic agreement and on granting Russian citizens visa-free travel within the 28-nation bloc. But Europe’s presidents and prime ministers remain divided on taking more drastic steps such as freezing assets and issuing travel bans on Russian officials.

European hesitancy reflected the reality that targeting influential Russian businessmen or major Russian companies would also harm Europe’s economic interests. U.S. trade with Russia is less than one-tenth of Europe’s.

Russian investors hold assets worth billions in European banks, particularly in Britain which is highly protective of its financial sector, and major exporters such as Germany and the Netherlands have far more at stake than the United States in Russia’s consumer economy.

Showing greater caution than Obama on sanctions, German Chancellor Angela Merkel said European penalties against Russia depend “on how the diplomatic process progresses.” EU President Herman Van Rompuy said travel bans, asset freezes and the cancellation of an EU-Russia summit could still come. Polish Prime Minister Donald Tusk acknowledged “no enthusiasm” in Europe for economic sanctions.

In some ways, the debate over sanctions echoes the Cold War doctrine of military strategy in which if two opponents fired off nuclear weapons, both sides would be annihilated.

“There is a kind of mutually assured destruction relationship here,” said Steven Pifer, a former U.S. ambassador to Ukraine and analyst at the Brookings Institution think tank in Washington. “Russia could say, âWell, we’re going to cut off your gas and you guys can now scramble and buy extra gas and pay big prices.’

“It would hurt the Europeans, but it also would cut off the biggest source of cash that flows into Russia today,” he said referring to oil and gas sales that account for about 60 percent of Russia’s exports and half of its government revenue. “So the Russians may threaten some things, but they also have to consider that if they do that what it would do to the Russian economy.”

The State Department sought to allay fears that Europe might find itself short on Russian gas.

“We understand that European gas inventories are well-above normal levels, due to a milder than usual winter, and could replace a loss of Russian exports for several months, if necessary,” said State Department spokeswoman Jen Psaki. “Naturally, we take the energy security of our friends very seriously.”

House Speaker John Boehner, R-Ohio, saw an opening for U.S. gas producers. He called on Obama to fast-track approval of U.S. exports of liquefied natural gas, claiming the Energy Department has a slow approval process that amounts to a de facto ban on American natural gas exports.

“We should not force our allies to remain dependent on Putin for their energy needs,” Boehner said.

The Energy Department has given final approval to one of about two dozen proposed liquefied natural gas export terminals in the past two years. Five other projects have received conditional backing.

However, even if the Energy Department approved all the pending permits from companies seeking to export natural gas, fuel could not begin flowing overseas for several years. A project in Sabine Pass, La., is tentatively scheduled to open in late 2015, but most others are not expected to begin operations until 2017 or later.

Ariel Cohen, an expert on Russian and Eurasian affairs at the Heritage Foundation in Washington, said he doesn’t know if the Europeans would be willing to impose tough sanctions, particularly against Russia’s banking and financial systems. Even if the Europeans don’t, the U.S. needs to take the lead or risk allowing Russia to alter current world order, he said.

“Either we take a lead or the international system goes back to the chaos and high-risk levels that existed before World War I and between World War I and World War II,” he said. “This is very serious. I cannot emphasize that enough. People who talk about âOh, we won’t get cheap gas from Russia’ or âThe Russians will get angry’ — they do not look at it beyond the current geopolitical and international order.”

If Russia grabs Crimea, Iran would be less willing to give up an ability to develop nuclear arms. “The message to Iran would be: If you have nuclear weapons you will not be attacked, your regime will be intact. If you don’t have nuclear weapons, your regime can be toppled and pieces of your territory can be taken away.”

As a result of its move into Ukraine, Cohen said Russia already has lost billions in its stock market drop and devaluation of the Russian ruble. It also stands to lose from a decline in tourism and future energy sales if European nations decide it’s time to reduce their dependence on Russian gas and buy it from North Africa, Qatar, Nigeria and the U.S.

For the U.S., the worst that can happen is that Russia will partially seize assets of companies like Coca-Cola, Boeing or Pepsi, he said. But that also would make Russia’s investment climate more difficult than it already is because of arbitrary rules, corruption and hard to understand taxation.

“It’s not clear how nasty Russian retaliation might be, but the main thing is not punishment,” Cohen said. “The main thing for both sides is to have sanity prevail — to get into a negotiating process. We need to walk this baby back, put it in a box and put it away.”

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